Abstract:

The objective of Islamic Microfinance is to reduce poverty and to bring about development by enabling the poor to enhance their earnings and enrich their social welfare. In order to achieve this objective, generating a sustainable source of loanable funds is crucial for the success of microfinance loan programs (MFLP). A sustainable source of loanable funds could be obtained if the institutions manage to recollect their amount invested that would cover the cost incurred in disbursing the loan. Therefore, transaction cost and repayment rate of the Islamic Microfinance are considered as critical factors that determined the survival of these institutions.  This paper will discuss the types of transaction cost incurred by microfinance institutions in providing Islamic micro financing facilities to combat poverty. In addition, the paper proposes and suggests an efficient transaction cost framework to be applied in Islamic microfinance program namely Mudarabah, Musyarakah and Bai salam.